Zero coupon bond yield is a calculation that helps investors evaluate the value of fixed-income securities that do not make periodic interest payments, also known as “zero-coupon bonds”. An example would be a 20-year bond with a face value of $1000 that is currently worth $300.
Calculating zero coupon bond yield is crucial because it provides investors with a clear understanding of the bond’s potential return. It allows investors to compare different bonds and make informed investment decisions. Historically, the development of zero-coupon bonds in the 1980s revolutionized the fixed-income market by providing investors with a new asset class offering unique risk and return characteristics.